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While conditions have since shifted sharply, the shadow banking sector drove the growth of global financial assets in 2021, according to a new report from the Financial Stability Board (FSB).

The global policy group reported that total global financial assets recorded strong growth last year, increasing by 7.7% to $486.6 trillion (all figures in U.S. dollars).

The rise in total assets was driven primarily by the non-bank sector, which grew assets by 8.9% in 2021 to $239.3 trillion, above its five-year average of 6.6% growth.

As a result, the shadow banking sector’s share of total global financial assets also rose from 48.6% to 49.2% in 2021, the report noted.

The FSB reported that the non-bank sector’s growth was driven by investment funds, particularly equity funds.

“The growth in investment fund assets was supported by a combination of flows and valuation effects, with equity funds’ growth driven mostly by increases in valuations,” the report said.

Since then, however, global economic and financial conditions have “deteriorated significantly,” the FSB said, resulting in declining valuations and “historically high” fund outflows.

“Higher inflation, higher interest rates, and lower growth have led to a reduction in asset values and have likely contributed to the trend in net outflows observed in the first three quarters of 2022, which would typically test funds that exhibit high levels of liquidity transformation,” it said.

While the level of outflows in global money market funds this year matched the levels seen in the first quarter of 2020, following the onset of the pandemic, the latest outflows did not trigger the same sort of liquidity stress, the FSB said.

“This is likely because these outflows happened steadily over the quarter, as opposed to over a few weeks as in 2020,” the FSB noted, adding that differences in the affected funds’ underlying assets may also have played a part.

Additionally, the report noted that the shadow banking sector’s interconnectedness with the traditional banking sector has continued to decrease. “This trend has been observed since 2013 both in terms of funding and exposures,” it said.